Applied Digital Corp. 10-Q

Item 1. Financial Statements APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share and par value data) November 30, 2024 May 31, 2024 ASSETS Current assets: Cash and cash equivalents $ 286,237 $ 3,339 Restricted cash 21,342 21,349 Accounts receivable 12,313 3,847 Prepaid expenses and other current assets 8,496 1,343 Current assets held for sale — 384 Total current assets 328,388 30,262 Property and equipment, net 772,664 340,381 Operating lease right of use assets, net 140,583 153,611 Finance lease right of use assets, net 261,452 218,683 Other assets 40,082 19,930 TOTAL ASSETS $ 1,543,169 $ 762,867 LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 192,017 $ 116,117 Accrued liabilities 31,625 26,282 Current portion of operating lease liability 23,096 21,705 Current portion of finance lease liability 136,511 107,683 Current portion of debt 6,543 10,082 Current portion of debt, at fair value 4,798 35,836 Customer deposits 16,125 13,819 Related party customer deposits — 1,549 Deferred revenue 6,187 37,674 Related party deferred revenue — 1,692 Due to customer 7,355 13,002 Other current liabilities 96 96 Total current liabilities 424,353 385,537 Long-term portion of operating lease liability 97,821 109,740 Long-term portion of finance lease liability 62,397 63,288 Long-term debt 468,244 79,472 Total liabilities 1,052,815 638,037 Commitments and contingencies (Note 10) Temporary equity Series E preferred stock, $ 0.001 par value, 2,000,000 shares authorized, 301,673 shares issued and outstanding at November 30, 2024, and no shares authorized, issued or outstanding at May 31, 2024 6,932 — Series F preferred stock, $ 0.001 par value, 53,191 shares authorized and issued, 43,000 outstanding at November 30, 2024, and no shares authorized, issued or outstanding at May 31, 2024 43,000 — Series E-1 preferred stock, $ 0.001 , 62,500 shares authorized, 6,359 shares issued and outstanding at November 30, 2024, and no shares authorized, issued or outstanding at May 31, 2024 5,850 — Stockholders' equity: Common stock, $ 0.001 par value, 400,000,000 shares authorized, 225,846,268 shares issued and 216,555,069 shares outstanding at November 30, 2024, and 144,083,944 shares issued and 139,051,142 shares outstanding at May 31, 2024 222 144 Treasury stock, 9,291,199 shares at November 30, 2024 and 5,032,802 shares at May 31, 2024, at cost ( 31,400 ) ( 62 ) Additional paid in capital 858,713 374,738 Accumulated deficit ( 392,963 ) ( 249,990 ) Total stockholders’ equity attributable to Applied Digital Corporation 434,572 124,830 TOTAL LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY $ 1,543,169 $ 762,867 See accompanying notes to the unaudited condensed consolidated financial statements 1 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share data) Three Months Ended Six Months Ended November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023 Revenue: Revenue $ 63,868 $ 38,569 $ 122,646 $ 70,708 Related party revenue — 3,634 1,926 7,819 Total revenue 63,868 42,203 124,572 78,527 Costs and expenses: Cost of revenues 52,361 29,769 113,421 54,990 Selling, general and administrative (1) 29,789 20,266 44,129 36,437 Loss/(gain) on classification of held for sale (2) 192 — ( 24,616 ) — Loss on abandonment of assets 141 — 769 — Loss from legal settlement — 80 — 2,380 Total costs and expenses 82,483 50,115 133,703 93,807 Operating loss ( 18,615 ) ( 7,912 ) ( 9,131 ) ( 15,280 ) Interest expense, net (3) 7,482 2,617 14,790 4,750 Loss on conversion of debt 25,410 — 33,612 — Loss on change in fair value of debt 87,218 — 85,439 — Loss on extinguishment of related party debt — — — 2,353 Net loss before income tax expenses ( 138,725 ) ( 10,529 ) ( 142,972 ) ( 22,383 ) Income tax expense (benefit) 1 — 1 — Net loss ( 138,726 ) ( 10,529 ) ( 142,973 ) ( 22,383 ) Net loss attributable to noncontrolling interest — — — ( 397 ) Preferred dividends ( 629 ) — ( 673 ) — Net loss attributable to Common Stockholders $ ( 139,355 ) $ ( 10,529 ) $ ( 143,646 ) $ ( 21,986 ) Basic and diluted net loss per share attributable to common stockholders $ ( 0.66 ) $ ( 0.10 ) $ ( 0.80 ) $ ( 0.21 ) Basic and diluted weighted average number of shares outstanding 209,560,339 109,663,030 179,119,398 105,067,375 (1) Includes related party selling, general and administrative expense of $ 0.1 million and $ 0.2 million for the three months ended November 30, 2024 and November 30, 2023, respectively, and $ 0.1 million and $ 0.3 million for the six months ended November 30, 2024 and November 30, 2023, respectively. See Note 5 - Related Party Transactions for further discussion of related party transactions. (2) Includes $ 25 million received in connection with the sale of our Garden City facility for the six months ended November 30, 2024. See Note 10 - Commitments and Contingencies for further discussion. (3) Includes related party interest expense of $ 0.7 million for the three and six months ended November 30, 2023. There was no related party debt outstanding during the three and six months ended November 30, 2024 and as such, no interest expense was incurred related to related party debt. See Note 5 - Related Party Transactions for further discussion of related party transactions. See accompanying notes to the unaudited condensed consolidated financial statements 2 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Temporary Equity and Stockholders’ Equity (Unaudited) For the Three Months ended November 30, 2024 and November 30, 2023 (In thousands, except share data) Temporary Equity Permanent Equity Series E Redeemable Preferred Stock Series F Convertible Preferred Stock Series E-1 Redeemable Preferred Stock Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Balance, August 31, 2024 301,673 $ 6,932 53,191 $ 48,350 — $ — 162,471,048 $ 162 ( 5,032,802 ) $ ( 62 ) $ 496,027 $ ( 254,281 ) $ 241,846 Shares issued in offering, net of costs — — — — — — 49,382,720 49 — — 149,768 — 149,817 Issuance of common stock from stock plans — — — — — — 497,271 1 — — ( 1 ) — — Conversions of debt — — — — — — 7,657,226 8 — — 48,736 — 48,744 Issuance of shares — — — — — — 528,541 1 — — ( 1 ) — — Issuance of warrants, at fair value — — — — — — — — — — 7,636 — 7,636 Conversion of warrants — — — — — — 3,853,605 4 — — ( 4 ) — — Preferred Series F Stock issuance costs — — — — — — — — — — ( 4,841 ) — ( 4,841 ) Preferred Series E-1 Stock, net of issuance costs — — — — 6,359 5,850 — — — — — — — Preferred Stock Dividends — — — — — — — — — — ( 672 ) 44 ( 628 ) Conversion of preferred stock — — ( 10,191 ) ( 5,350 ) — — 1,455,857 1 — — 10,190 — 10,191 Stock-based compensation — — — — — — — — — — 3,461 — 3,461 Share repurchase — — — — — — — ( 4 ) ( 4,258,397 ) ( 31,338 ) — — ( 31,342 ) Purchase of capped call options — — — — — — — — — — ( 51,750 ) — ( 51,750 ) Purchase of prepaid forward contract — — — — — — — — — — ( 52,736 ) — ( 52,736 ) Reclass of conversion option — — — — — — — — — — 252,900 — 252,900 Net loss — — — — — — — — — — — ( 138,726 ) ( 138,726 ) Balance, November 30, 2024 301,673 $ 6,932 43,000 $ 43,000 6,359 $ 5,850 225,846,268 $ 222 ( 9,291,199 ) $ ( 31,400 ) $ 858,713 $ ( 392,963 ) $ 434,572 Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Total Equity Shares Amount Shares Amount Balance, August 31, 2023 110,850,885 $ 110 ( 5,001,728 ) $ ( 62 ) $ 240,073 $ ( 112,173 ) $ 127,948 $ 127,948 Shares issued in offering, net of costs 6,879,070 8 — — 33,432 — 33,440 33,440 Issuance of common stock from stock plans 5,004,105 5 — — ( 5 ) — — — Stock-based compensation — — — — 4,799 — 4,799 4,799 Net loss — — — — — ( 10,529 ) ( 10,529 ) ( 10,529 ) Balance, November 30, 2023 122,734,060 $ 123 ( 5,001,728 ) $ ( 62 ) $ 278,299 $ ( 122,702 ) $ 155,658 $ 155,658 See accompanying notes to the unaudited condensed consolidated financial statements 3 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Changes in Temporary Equity and Stockholders’ Equity (Unaudited) For the Six Months ended November 30, 2024 and November 30, 2023 (In thousands, except share data) Temporary Equity Permanent Equity Series E Redeemable Preferred Stock Series F Convertible Preferred Stock Series E-1 Redeemable Preferred Stock Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Balance, May 31, 2024 — $ — — $ — — $ — 144,083,944 $ 144 ( 5,032,802 ) $ ( 62 ) $ 374,738 $ ( 249,990 ) $ 124,830 Shares issued in offering, net of costs — — — — — — 55,506,938 55 — — 180,783 — 180,838 Issuance of common stock from stock plans — — — — — — 1,267,179 2 — — ( 2 ) — — Conversions of debt — — — — — — 19,050,204 19 — — 104,926 — 104,945 Issuance of shares — — — — — — 628,541 1 — — 518 — 519 Issuance of warrants, at fair value — — — — — — — — — — 44,115 — 44,115 Conversion of warrants — — — — — — 3,853,605 4 — — ( 4 ) — — Preferred Series E Stock, net of issuance costs 301,673 6,932 — — — — — — — — 6 — 6 Preferred Series F Stock, net of issuance costs — — 53,191 48,350 — — — — — — — — — Preferred Series F Stock issuance costs — — — — — — — — — — ( 4,841 ) — ( 4,841 ) Preferred Series E-1 Stock, net of issuance costs — — — — 6,359 5,850 — — — — — — — Preferred Stock Dividends — — — — — — — — — — ( 672 ) — ( 672 ) Conversion of preferred stock — — ( 10,191 ) ( 5,350 ) — — 1,455,857 1 — — 10,190 — 10,191 Stock-based compensation — — — — — — — — — — 542 — 542 Share repurchase — — — — — — — ( 4 ) ( 4,258,397 ) ( 31,338 ) — — ( 31,342 ) Purchase of capped call options — — — — — — — — — — ( 51,750 ) — ( 51,750 ) Purchase of prepaid forward contract — — — — — — — — — — ( 52,736 ) — ( 52,736 ) Reclass of conversion option — — — — — — — — — — 252,900 — 252,900 Net loss — — — — — — — — — — — ( 142,973 ) ( 142,973 ) Balance, November 30, 2024 301,673 $ 6,932 43,000 $ 43,000 6,359 $ 5,850 225,846,268 $ 222 ( 9,291,199 ) $ ( 31,400 ) $ 858,713 $ ( 392,963 ) $ 434,572 Common Stock Treasury Stock Additional Paid in Capital Accumulated Deficit Stockholders’ Equity Noncontrolling Interest Total Equity Shares Amount Shares Amount Balance, May 31, 2023 100,927,358 $ 101 ( 5,001,728 ) $ ( 62 ) $ 160,194 $ ( 100,716 ) $ 59,517 $ 10,162 $ 69,679 Shares issued in offering, net of costs 14,787,598 16 — — 98,140 — 98,156 — 98,156 Issuance of common stock from stock plans 5,534,837 5 — — ( 5 ) — — — — Stock-based compensation — — — — 10,440 — 10,440 — 10,440 Stock issuance costs — — — — ( 234 ) — ( 234 ) — ( 234 ) Extinguishment of noncontrolling interest 1,484,267 1 — — 9,764 — 9,765 ( 9,765 ) — Net loss — — — — — ( 21,986 ) ( 21,986 ) ( 397 ) ( 22,383 ) Balance, November 30, 2023 122,734,060 $ 123 ( 5,001,728 ) $ ( 62 ) $ 278,299 $ ( 122,702 ) $ 155,658 $ — $ 155,658 s ee accompanying notes to the unaudited condensed consolidated financial statements 4 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended November 30, 2024 November 30, 2023 CASH FLOW FROM OPERATING ACTIVITIES Net loss $ ( 142,973 ) $ ( 22,383 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 60,761 21,284 Stock-based compensation 542 10,440 Lease expense 15,380 2,294 Loss on extinguishment of debt — 2,353 Loss on legal settlement — 2,380 Amortization of debt issuance costs 2,424 352 Gain on classification of held for sale ( 24,616 ) — Loss on conversion of debt 33,612 — Loss on change in fair value of debt 85,439 — Loss on abandonment of assets 769 189 Changes in operating assets and liabilities: Accounts receivable ( 8,466 ) ( 225 ) Prepaid expenses and other current assets ( 7,153 ) 496 Customer deposits 2,306 4,274 Related party customer deposits ( 1,549 ) — Deferred revenue ( 31,487 ) 2,883 Related party deferred revenue ( 1,692 ) 429 Accounts payable ( 82,849 ) 6,440 Accrued liabilities ( 2,515 ) ( 1,914 ) Due to customer ( 5,647 ) — Lease assets and liabilities ( 19,382 ) ( 19,198 ) Other assets ( 1,058 ) ( 1,040 ) CASH FLOW (USED IN) PROVIDED BY OPERATING ACTIVITIES ( 128,154 ) 9,054 CASH FLOW FROM INVESTING ACTIVITIES Purchases of property and equipment and other assets ( 225,847 ) ( 45,828 ) Proceeds from satisfaction of contingency on sale of assets 25,000 — Finance lease prepayments ( 5,270 ) ( 19,388 ) Purchases of investments ( 1,422 ) ( 390 ) CASH FLOW USED IN INVESTING ACTIVITIES ( 207,539 ) ( 65,606 ) CASH FLOW FROM FINANCING ACTIVITIES Repayment of finance leases ( 62,170 ) ( 13,071 ) Borrowings of long-term debt 275,000 4,732 Borrowings of related party debt — 8,000 Repayments of long-term debt ( 133,314 ) ( 4,472 ) Repayment of related party debt — ( 45,500 ) Payment of deferred financing costs ( 28,927 ) — Proceeds from issuance of common stock 191,590 98,156 Common stock issuance costs ( 10,233 ) ( 234 ) Proceeds from issuance of preferred stock 67,085 — Preferred stock issuance costs ( 5,947 ) — Dividends issued on preferred stock ( 672 ) — Proceeds from issuance of SAFE agreement included in long-term debt 12,000 — Repurchase of shares ( 31,342 ) Proceeds from convertible notes 450,000 — Purchase of capped call options ( 51,750 ) — Purchase of prepaid forward contract ( 52,736 ) — CASH FLOW PROVIDED BY FINANCING ACTIVITIES 618,584 47,611 NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 282,891 ( 8,941 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD 31,688 43,574 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $ 314,579 $ 34,633 See accompanying notes to the unaudited condensed consolidated financial statements 5 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended November 30, 2024 November 30, 2023 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 33,144 $ 4,370 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES Operating right-of-use assets obtained by lease obligation $ — $ 69,329 Finance right-of-use assets obtained by lease obligation $ 97,489 $ 96,946 Property and equipment in accounts payable and accrued liabilities $ 165,721 $ 23,572 Conversion of debt to common stock $ 104,945 $ — Extinguishment of non-controlling interest $ — $ 9,765 Loss from legal settlement $ — $ 2,300 Conversion of preferred stock to common stock $ 10,191 $ — Cashless exercise of warrants $ 4 $ — Issuance of warrants, at fair value $ 44,115 $ — See accompanying notes to the unaudited condensed consolidated financial statements 6 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 1. Business and Organization Applied Digital Corporation (the “Company”), is a designer, builder, and operator of digital infrastructure providing cost-competitive solutions to customers. The Company has three reportable segments. Financial information for each segment is contained in “Note 11 - Business Segments”. 2. Basis of Presentation and Significant Accounting Policies Principles of Consolidation The accompanying interim unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company's annual consolidated financial statements on Form 10-K have been condensed or omitted. The unaudited condensed consolidated balance sheet as of May 31, 2024 has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required for audited annual financial statements. In the Company’s opinion, all necessary adjustments have been made for the fair presentation of the results of the interim periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year. For further information, please refer to and read these interim unaudited condensed consolidated financial statements in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2024 filed with the SEC on August 30, 2024. Significant Accounting Policies and Use of Estimates Use of Estimates The preparation of the unaudited condensed consolidated financial statements is in conformity with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers. Data Center Hosting Revenue The Company provides energized space to customers who locate their hardware within the Company’s co-hosting facility. All Data Center Hosting performance obligations are achieved simultaneously by providing the hosting environment for the customers’ operations. Customers pay a fixed rate to the Company in exchange for a managed hosting environment supported by customer-provided equipment. Revenue is recognized based on the contractual fixed rate, net of any credits for non-performance, over the term of the agreements. Any ancillary revenue for other services is generally recognized at a point in time when the services are complete. Customer contracts include advance payment terms. All advanced service payments are recorded as deferred revenue and are recognized as revenue once the related service is provided. Cloud Services Revenue The Company also provides managed cloud infrastructure services to customers, such as artificial intelligence and machine learning developers, to help develop their advanced products. Customers pay a fixed rate to the Company in exchange for managed cloud services supported by Company-provided equipment. Revenues are recognized based on the fixed rate, net of any credits for non-performance, over the term of the agreements. 7 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 Segments The Company has identified three reportable segments: data center hosting (“Data Center Hosting Business”), cloud services (“Cloud Services Business”), and high-performance compute hosting (“HPC Hosting Business”). The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources on both a consolidated basis and on the basis of these three reportable segments. Intercompany transactions between segments are excluded for management reporting purposes. The Data Center Hosting Business operates data centers to provide energized space to crypto mining customers. Customer-owned hardware is installed in the Company’s facilities and the Company provides operational and maintenance services for a fixed fee. The Cloud Services Business operates through our wholly-owned subsidiary, Applied Digital Cloud Corporation, and provides cloud services to customers at third party colocation centers located in Colorado, Minnesota, Nevada and Utah, such as artificial intelligence and machine learning developers, to develop their advanced products. Customers pay a fixed rate to the Company in exchange for an energized space supported by Company-provided equipment. The HPC Hosting Business designs, builds, and operates data centers which are being designed to support high-compute applications using advanced and sophisticated infrastructures to provide services to customers. See Note 2 - Basis of Presentation and Significant Accounting Policies to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2024, as filed with the SEC, for additional information regarding the Company’s significant accounting policies and use of estimates. Reclassifications Income Statement We have reclassified certain prior period amounts in our unaudited condensed consolidated statements of operations to conform to our current period presentation. Specifically, we have reclassified certain amounts of “Selling, general and administrative” expenses to “Cost of revenues”. Additionally, we have reclassified certain amounts of “Selling, general and administrative” expense and “Cost of revenues” to “Interest expense, net.” We have also condensed the presentation of segment revenue into a single “Revenue” caption as segment disclosures are presented in Note 11 - Business Segments. These reclassifications had no impact on reported net loss, cash flows, or total assets and liabilities. Cash, Cash Equivalents, and Restricted Cash The Company has restricted cash related to its letters of credit totaling $ 28.3 million, which is held in money market funds. The Company is required to keep these balances in separate accounts for the duration of the letter of credit agreements, which have terms of up to two years . These letters of credit were issued in lieu of security deposits. The Company considers the money market funds to be Level 1 which the Company believes approximates fair value. Cash, cash equivalents, and restricted cash within the unaudited condensed consolidated balance sheets that are included in the unaudited condensed consolidated statements of cash flows as of November 30, 2024 and May 31, 2024 were as follows (in thousands): November 30, 2024 May 31, 2024 Cash and cash equivalents $ 286,237 $ 3,339 Restricted cash 21,342 21,349 Restricted cash included in other assets 7,000 7,000 Total cash, cash equivalents, and restricted cash $ 314,579 $ 31,688 8 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 Liquidity As noted above, the Company had a working capital deficit of $ 96.0 million which raises substantial doubt about the Company's ability to continue as a going concern. Based on an analysis of subsequent events which are disclosed in "Note 13 - Subsequent Events", the Company believes that substantial doubt to continue as a going concern has been alleviated. Therefore, the Company has sufficient liquidity to meet its obligations as they become due for at least twelve months from the date these financial statements were issued. 3. Property and Equipment Property and equipment consisted of the following as of November 30, 2024 and May 31, 2024 (in thousands): Estimated Useful Life November 30, 2024 May 31, 2024 Networking equipment, electrical equipment, and software 5 years $ 33,640 $ 32,517 Electric generation and transformers 15 years 9,933 9,933 Land and building Building 39 years 108,847 103,990 Land 19,047 6,205 Land improvements 15 years 1,380 1,380 Leasehold improvements 3 years - 7 years 1,142 1,051 Construction in progress 609,055 190,162 Other equipment and fixtures 5 years - 7 years 9,932 9,552 Total cost of property and equipment 792,976 354,790 Accumulated depreciation ( 20,312 ) ( 14,409 ) Property and equipment, net $ 772,664 $ 340,381 Depreciation expense totaled $ 3.1 million and $ 6.1 million for the three and six months ended November 30, 2024, respectively, and $ 2.6 million and $ 4.9 million for the three and six months ended November 30, 2023, respectively. 4. Revenue from Contracts with Customers Below is a summary of the Company’s revenue concentration by major customers for the three and six months ended November 30, 2024 and November 30, 2023, respectively. Three Months Ended Six Months Ended November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023 Customer A 51 % 70 % 49 % 69 % Customer G 16 % 11 % 16 % — % Customer H 28 % — % 27 % — % 9 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 Deferred Revenue Changes in the Company's deferred revenue balances for the six months ended November 30, 2024 and November 30, 2023, respectively, are shown in the following table (in thousands): Six Months Ended November 30, 2024 November 30, 2023 Balance, beginning of period $ 39,366 $ 48,692 Advance billings 87,522 81,839 Revenue recognized ( 124,322 ) ( 78,527 ) Other adjustments 3,621 — Less: Related party balances — ( 1,953 ) Balance, end of period $ 6,187 $ 50,051 Customer Deposits Changes in the Company's customer deposits balances for the six months ended November 30, 2024 and November 30, 2023, respectively, are shown in the following table (in thousands): Six Months Ended November 30, 2024 November 30, 2023 Balance, beginning of period $ 15,367 $ 36,370 Customer deposits received 5,698 4,274 Customer deposits refunded ( 3,373 ) — Customer deposits applied ( 1,567 ) — Less: Related party balances — ( 3,811 ) Balance, end of period $ 16,125 $ 36,833 5. Related Party Transactions Related Party Revenue The following table illustrates related party revenue for the three and six months ended November 30, 2024 and November 30, 2023 (in thousands): Three Months Ended Six Months Ended November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023 Customer D* $ — $ 1,986 $ 992 $ 4,319 Customer E** $ — $ 1,648 $ 678 $ 3,500 * Customer D is a subsidiary of an entity which, during the first quarter of fiscal year 2025, was deemed to beneficially own over 5 % of the Company's outstanding common stock. As of July 25, 2024, the controlling individual of the entity filed a Schedule 13G to report the fact that as of the date thereof, the entity had ceased to be a beneficial owner of more than 5 % of such class of securities. ** Customer E is 60 % owned by an individual who, during the first quarter of fiscal year 2025, was deemed to beneficially own over 5 % of the Company's outstanding common stock. As of July 25, 2024, the individual filed a Schedule 13G to report the fact that as of the date thereof, the individual had ceased to be a beneficial owner of more than 5 % of such class of securities. 10 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 The following table illustrates related party deferred revenue and deposits balances as of November 30, 2024 and May 31, 2024 (in thousands): Customer D balances as of Customer E balances as of November 30, 2024 May 31, 2024 November 30, 2024 May 31, 2024 Deferred revenue $ — $ 993 $ — $ 699 Customer deposits $ — $ 895 $ — $ 654 Related Party Sublease Income The Company received sublease income from B. Riley Asset Management, which is also a wholly-owned subsidiary of B. Riley Financial, Inc. As previously disclosed, the Company’s Chairman and Chief Executive Officer, served as the President of B. Riley Asset Management, and effective February 5, 2024, resigned from that position and as such, B. Riley ceased being a related party as of May 31, 2024. Sublease income is included in selling, general and administrative expenses in our unaudited condensed consolidated statements of operations. Related party sublease income for the three and six months ended November 30, 2023 was $ 24,000 and $ 47,100 , respectively. Other Related Party Transactions Related party transactions included within selling, general, and administrative expense on the unaudited condensed consolidated statement of operations include the following: • construction and consulting costs of $ 0.1 million and $ 0.2 million during the three and six months ended November 30, 2023 were incurred with a company owned by a family member of the Company’s Chief Administrative Officer. There were no transactions with this related party during the three and six months ended November 30, 2024. • software license fees of $ 0.1 million and $ 0.1 million, during the three and six months ended November 30, 2024, respectively, and $ 60.8 thousand and $ 0.1 million during the three and six months ended November 30, 2023, respectively, were incurred with a company whose chairman is also a member of the Company’s Board of Directors. 6. Debt Long-term debt consisted of the following components (in thousands): Interest Rate Maturity Date November 30, 2024 May 31, 2024 Senior Unsecured Convertible Notes 2.75 % June 2030 450,000 — Macquarie Promissory Note (1) 0.25 % May 2026 166,500 — Starion Ellendale Loan (2) 7.48 % February 2028 14,256 16,145 Vantage Transformer Loan 6.50 % February 2029 — 3,609 Cornerstone Bank Loan (3) 8.59 % March 2029 14,255 15,576 Yorkville Convertible Debt — % April and June 2025 — 80,243 Starion Term Loan (4) 6.50 % July 2027 8,564 10,021 Other long-term debt (5) 12,259 297 Deferred financing costs, net of amortization ( 191,047 ) ( 501 ) Less: Current portion of debt ( 6,543 ) ( 45,918 ) Long-term debt, net $ 468,244 $ 79,472 (1) The Macquarie Promissory Note is guaranteed by APLD Holdings 2 LLC, a wholly-owned subsidiary of the Company, and is secured by a continuing security interest in all of the membership interests of the borrower, APLD ELN-02 Holdings LLC, and all related proceeds. 11 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 (2) The Starion Ellendale Loan is guaranteed by APLD ELN-01 LLC, a wholly-owned subsidiary of the Company, and is secured by the Ellendale facility, a security interest in substantially all of the assets of APLD ELN-01 LLC, and a security interest in the form of a collateral assignment of the Company’s rights and interests in all master hosting agreements related to the Ellendale Facility. (3) The Cornerstone Bank Loan is guaranteed by APLD GPU-01, LLC, a wholly-owned subsidiary of the Company, and is secured by a security interest in multiple Terms of Service Agreements for HPC based systems related to AI Cloud Computing Services, which are to be serviced at the Jamestown hosting facility. (4) The Starion Term Loan is guaranteed by APLD Hosting, LLC, a wholly-owned subsidiary of the Company, and is secured by the Jamestown hosting facility, a security interest in substantially all of the assets of APLD Hosting LLC, and interests in all master hosting agreements related to the Jamestown hosting facility. (5) Inclusive in this number is $ 12.0 million of proceeds from the issuance of two SAFE agreements which were accounted for as liabilities. See further discussion below. Remaining Principal Payments Below is a summary of the remaining principal payments due over the life of the term loans as of November 30, 2024 (in thousands): Remainder of FY25 $ 4,913 FY26 176,953 FY27 11,132 FY28 7,659 FY29 3,176 Thereafter (1) 462,000 Total $ 665,833 (1) Includes $ 12.0 million of proceeds from the issuance of two SAFE agreements which were accounted for as liabilities. See further discussion below. Letters of Credit As of November 30, 2024, the Company had letters of credit totaling $ 28.3 million. The Company has restricted cash related to its letters of credit and is required to keep these balances in separate accounts for the duration of the letter of credit agreements. The Company presents all restricted cash amounts with letter of credit terms of 12 months or less within the Restricted Cash caption within current assets and any amounts with related letter of credit terms of over 12 months in Other Assets. Yorkville Convertible Debt During the fiscal year ended May 31, 2024, the Company entered into two prepaid advance agreements with YA II PN, LTD. (“YA Fund”) for promissory notes totaling $ 92.1 million (collectively the “YA Notes”), issued on March 27, 2024 (the “March Note”), April 24, 2024, and May 24, 2024 (the “May PPA”). The YA Notes were convertible into shares of the Company’s common stock. During the three months ended November 30, 2024, $ 23.3 million of the YA Notes were converted into approximately 7.7 million shares of common stock and during the six months ended November 30, 2024, $ 71.3 million of the YA Notes were converted into approximately 19.1 million shares of common stock. The Company recorded a loss on conversion of debt of $ 25.4 million and $ 33.6 million during the three and six months ended November 30, 2024, respectively, in its unaudited condensed consolidated statements of operations. The fair value of the YA Notes was calculated on an as-converted basis using quoted market prices of the Company's outstanding common stock; however, as of November 30, 2024, YA Fund had converted the maximum amount of shares allowable under Nasdaq rules and regulations and as such, the remaining balance of $ 4.8 million under the March Note was payable in cash. Subsequent to the quarter end, the Company repaid the $ 4.8 million in full, including all outstanding and unpaid principal, accrued interest, fees, and expenses, as well as the $ 2.1 million Commitment Fee under SEPA (as defined below). 12 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 CIM Arrangement & Warrants On June 7, 2024, APLD Holdings 2 LLC (the “Borrower”), a subsidiary of the Company, entered into a promissory note (the “CIM Promissory Note”) with CIM APLD Lender Holdings, LLC, a Delaware limited liability company (the “Lender”). The CIM Promissory Note provides for borrowings up to $ 125 million. During the six months ended November 30, 2024, the total amount borrowed under the CIM Promissory Note was $ 125 million. On November 27, 2024, in connection with the issuance of the Macquarie Promissory Note and receipt by the Company of the proceeds related thereto (as described below), the Company repaid the CIM Promissory Note in full, including all outstanding and unpaid principal, accrued interest, fees, and expenses. The associated extinguishment costs were capitalized directly into Construction in Progress (CIP), as the CIM Promissory Note was tied to the ELN-02 Project and was therefore considered part of the construction cost. As of November 30, 2024, the CIP balance includes $ 9.4 million related to the extinguishment of the CIM Promissory Note. Pursuant to the CIM Promissory Note, the Company issued warrants to purchase up to 9,265,366 shares of common stock (the “CIM Warrants”). The CIM Warrants were issuable in two tranches for the purchase of up to 6,300,449 Common Shares (the “Initial Warrants”) and 2,964,917 Common Shares (the “Additional Warrants”), respectively. The Initial Warrants were issued June 17, 2024 and the Additional Warrants were issued August 11, 2024. The CIM Warrants are exercisable upon issuance and have a five-year term. The CIM Warrants have an exercise price of $ 4.8005 per share, which exercise price may be paid in cash, by net settlement or by a combination of cash and net settlement but must be exercised by net settlement if no registration covering the exercise of the Warrants remains effective. The CIM Warrants were measured at fair value using a Black-Scholes Option Pricing model. Inherent in pricing models are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield, which are considered Level 3 inputs. The estimated fair value of the CIM Warrants was based on the following significant inputs: Initial Warrants Additional Warrants Warrant issue date June 17, 2024 August 11, 2024 Contractual term 5 years 5 years Volatility 105 % 110 % Risk-free rate 4.25 % 3.76 % Dividend yield — % — % The fair value of the Initial Warrants and Additional Warrants was $ 4.36 and $ 3.04 per warrant, respectively. The total fair value of the CIM Warrants was $ 36.5 million and was recorded in the unaudited condensed consolidated statements of changes in temporary equity and stockholders’ equity. The Company deferred the recognition of the fair value of the Initial and Additional Warrants as a reduction in the net carrying amount of the CIM Promissory Note. After the repayment of the CIM Promissory Note, the remaining value of the CIM Warrants recorded as a reduction of the CIM Promissory Note was capitalized to CIP. During the quarter ended November 30, 2024, 7.0 million of the CIM Warrants were exercised on a cashless basis for approximately 3.9 million shares of the Company’s common stock in a net settlement transaction. As of November 30, 2024, approximately 2.3 million of Additional Warrants are outstanding. Yorkville Amendments In connection with the CIM Promissory Note, the Company also entered into a Consent, Waiver and First Amendment to Prepaid Advance Agreements (the “Consent”) with YA Fund. In exchange for giving its consent to the transaction with the CIM Lender, the Company agreed to issue an aggregate of 100,000 shares of common stock to YA Fund and to conditionally lower the floor price from $ 3.00 to $ 2.00 so long as the daily Volume Weighted Average Price (“VWAP”) is less than $ 3.00 per share of common stock for five out of seven trading days. The Company further agreed to deliver a security agreement whereby its subsidiary, Applied Digital Cloud Corporation, would grant a springing lien on substantially all of its assets subject to customary carve-outs to secure the YA notes issued in favor of YA Fund. Pursuant to the Consent, YA Fund also consented to future project-level financing at the HPC Ellendale facility. In addition, 13 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 pursuant to the terms of the Consent, certain provisions of the March PPA and the May PPA were amended. Upon issuance of the 100,000 shares, the Company recorded the value of the shares at their grant date fair value as an increase in the loss on change in fair value of debt caption on the unaudited condensed consolidated statements of operations. On October 16, 2024, the Company entered into a letter agreement with YA Fund, whereby the Company agreed to satisfy its obligations with respect to the Commitment Fee (as defined below) in cash by increasing the principal amount due under the March Note in an equivalent amount, instead of issuing the Commitment Shares (as defined below). The Commitment Fee has been paid in full subsequent to November 30, 2024 as part of the repayment by the Company of the March Note. On October 29, 2024, the Company entered into certain amendments to the March prepaid advance agreement and the March Note. The amendments (i) provided consent to the Convertible Notes (as defined below) offering and share repurchase transactions (as described below) and (ii) removed certain prior restrictions on redemption of the March Note before January 1, 2025. SAFE In the first fiscal quarter of 2025, Applied Digital Cloud Corporation (“ADCC”), a wholly-owned subsidiary of the Company, entered into two SAFE agreements totaling $ 12.0 million with an investor (the “Investor”). Under the terms of the SAFE agreements, the Investor has the right to certain shares of ADCC’s preferred stock. If an equity financing transaction is completed by ADCC before the termination of the SAFE agreements, the SAFE agreements will automatically convert into the number of shares of preferred stock equal to the purchase amount divided by the discount price, which will be the lowest price per share of the preferred stock sold in the equity financing transaction multiplied by the discount rate ( 90 %). If there is a liquidity event before the termination of the SAFE agreements, the Investor will automatically be entitled to receive a portion of proceeds, due and payable to the Investor immediately prior to, or concurrent with, the occurrence of such liquidity event, equal to the greater of (i) the purchase amount or (ii) the amount payable on the number of shares of common stock equal to the purchase amount divided by the liquidity price (the price per share equal to the fair market value of the common stock at the time of the liquidity event, as determined by reference to the purchase price payable in connection with such liquidity event, multiplied by the discount rate). If there is a dissolution event before the termination of the SAFE agreements, the Investor will automatically be entitled to receive a portion of proceeds equal to the purchase amount, due and payable to the Investor immediately prior to the occurrence of the dissolution event. In a liquidity or dissolution event, the SAFE agreements are intended to operate like standard non-participating preferred stock. The Investor’s right to receive the purchase amount is junior to payments for outstanding indebtedness and creditor claims, on par with payments for other SAFE agreements and preferred stock, and senior to payments for common stock. The SAFE agreements will automatically terminate immediately following the earliest to occur of: (i) the issuance of capital stock to the Investor pursuant to the automatic conversion of the SAFE agreements; or (ii) the payment, or setting aside for payment, of amounts due the Investor. The Investor shall have the right, but not the obligation, to purchase up to its Pro Rata Share (the ratio of (i) the purchase amount of the SAFE agreements to (ii) the aggregate purchase amounts of all SAFE agreements issued by ADCC prior to the equity financing transaction) of the securities issued in the equity financing transaction, on the same terms, conditions and pricing afforded to the other investors participating in the equity financing transaction. The SAFE agreements were accounted in accordance with ASC 480: Distinguishing Liabilities from Equity. Per the SAFE agreements, as the underlying share class has not been issued yet and as such, equity classification cannot be determined based on redemption rights, these agreements were classified as liabilities and included in long-term debt at their face value on the Company’s unaudited condensed consolidated balance sheets. Senior Unsecured Convertible Notes On November 4, 2024, the Company issued $ 450.0 million aggregate principal amount of 2.75 % Senior Unsecured Convertible Notes due June 2030 (the “Convertible Notes”). The net proceeds from the sale of the Convertible Notes was approximately $ 435.2 million after deducting the initial purchasers’ discounts and commissions and estimated offering 14 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 expenses payable by the Company. The Company used approximately $ 84 million of the net proceeds from the offering to fund share repurchases of common stock in connection with the offering including (i) $ 52.7 million to fund the cost of entering into a prepaid forward repurchase transaction (as described below) and (ii) $ 31.3 million to repurchase shares of common stock with which the Company repurchased approximately 4.3 million shares at $ 7.36 a share, the stock price on October 30, 2024, the trading day preceding the transaction close. In addition, approximately $ 51.8 million of the net proceeds from the offering were used to pay the cost of the capped call transactions (as described below) and the remainder of the net proceeds were used for general corporate purposes. Also on November 4, 2024, the Company entered into an indenture with respect to the Convertible Notes with Wilmington Trust, National Association, as trustee (the “Indenture”). The Convertible Notes are senior unsecured obligations of the Company and bear interest at a rate of 2.75 % per year payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2025. The Convertible Notes will mature on June 1, 2030, unless earlier converted, redeemed or repurchased in accordance with terms described below. Prior to March 1, 2030, the Convertible Notes are convertible only upon the occurrence of certain events. On or after March 1, 2030 until the close of business on the second scheduled trading day immediately preceding the maturity date of the Convertible Notes, holders may convert the Convertible Notes at any time (the “Conversion Option”). The Convertible Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election, subject to certain restrictions. The initial conversion rate is 102.5431 shares per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $ 9.75 per share of common stock). The conversion rate is subject to customary anti-dilution adjustments. In addition, following certain events that occur prior to the maturity date or if the Company delivers a notice of redemption, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such corporate event or notice of redemption. Prior to December 1, 2027, the Company may not redeem the Convertible Notes. On or after December 1, 2027, the Company may redeem for cash all or any portion of the Convertible Notes, at its option, if the last reported sale price of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides a notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to 100 % of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. If the Company undergoes a “fundamental change,” as defined in the Indenture, prior to maturity, subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Convertible Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Indenture contains customary terms and covenants, including certain events of default. In accounting for the issuance of the Convertible Notes, the Conversion Option of the Convertible Notes was deemed an embedded derivative requiring bifurcation from the Convertible Notes (the “host contract”) and separate accounting as an embedded derivative liability, resulting from the Company not having the necessary number of authorized but unissued shares of its common stock available to settle the Conversion Option of the Convertible Notes in shares on the date of issuance. The proceeds from the Convertible Notes were first allocated to the embedded derivative liability and the remaining proceeds were then allocated to the host contract. On November 4, 2024, the issuance date, the fair value of the embedded derivative liability representing the Conversion Option was $ 149.9 million and the remaining $ 286.6 million was allocated to the host contract. As such, the Company recognized a $ 13.5 million gain on change in fair value of debt at issuance. Subsequently, on November 20, 2024, the stockholders of the Company approved an increase to the number of authorized shares of common stock to an amount sufficient to settle the Conversion Option of the Convertible Notes fully in shares. As a result of the increase to the number of authorized shares of common stock, the Company revalued the Conversion Option to its fair value as of November 20, 2024 of $ 252.9 million and reclassified the embedded derivative to additional 15 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 paid-in capital on its unaudited condensed consolidated balance sheets. In doing so, the Company recognized a $ 103.0 million loss on change in fair value of debt as of November 20, 2024. This loss combined with the gain recognized at issuance resulted in a total loss on fair value of debt of $ 89.6 million which is included on the unaudited condensed consolidated statements of operations. As of November 30, 2024, the embedded Conversion Option derivative is included in additional paid-in capital in the unaudited condensed consolidated balance sheets and is not required to be remeasured provided the requirements to qualify for the scope exception in ASC 815-10-15-74(a) continue to be met. Prepaid Forward Repurchase Transaction In connection with the offering of the Convertible Notes, the Company entered into a privately negotiated prepaid forward repurchase transaction (the “Prepaid Forward”) with one of the initial purchasers (the “Forward Counterparty”). Pursuant to the Prepaid Forward and the Indenture, the Company used approximately $ 52.7 million of the net proceeds from the offering of the Convertible Notes to fund the Prepaid Forward. The initial aggregate number of shares of common stock underlying the Prepaid Forward was approximately 7.2 million shares of common stock. The maturity date for the Prepaid Forward is November 3, 2025, although it may be settled earlier in whole or in part. As of November 30, 2024, the purchase price of the Prepaid Forward is included in additional paid-in capital in the unaudited condensed consolidated balance sheets and is not required to be remeasured provided the requirements to qualify for the scope exception in ASC 815-10-15-74(a) continue to be met. Capped Call Transaction In connection with the offering of the Convertible Notes, the Company entered into privately negotiated capped call transactions (the “Base Capped Call Transactions”) with certain financial institutions (the “Option Counterparties”). In addition, in connection with the initial purchasers’ exercise of their option to purchase additional Convertible Notes, the Company entered into additional capped call transactions (the “Additional Capped Call Transactions,” and, together with the Base Capped Call Transactions, the “Capped Call Transactions”) with each of the Option Counterparties. The Company used approximately $ 51.8 million of the net proceeds from the offering of the Convertible Notes to pay the cost of the Capped Call Transactions. The Capped Call Transactions cover, subject to customary anti-dilution adjustments, the aggregate number of shares of common stock that initially underlie the Convertible Notes, and are expected generally to reduce potential dilution to the common stock upon any conversion of the Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the Capped Call Transactions, which is defined as $ 14.72 . The Capped Call Transactions are separate transactions entered into by the Company and are not part of the terms of the Convertible Notes. As of November 30, 2024, the purchase price of the Capped Call Transaction is included in additional paid-in capital in the unaudited condensed consolidated balance sheets and is not required to be remeasured provided the requirements to qualify for the scope exception in ASC 815-10-15-74(a) continue to be met. Macquarie Promissory Note On November 27, 2024, APLD ELN-02 Holdings LLC, a wholly-owned subsidiary of the Company, entered into a promissory note with Macquarie Equipment Capital, Inc. (the “Macquarie Promissory Note”). The Macquarie Promissory Note provides for a loan of $ 150 million and matures on the earlier of (i) the date of acceleration of the loan or (ii) May 27, 2026. However, to the extent that the ELN-02 Project (as defined therein) is not completed by December 6, 2025, the Company must repay the full outstanding principal balance of the Macquarie Promissory Note together with accrued interest and any other amounts then due and payable. Additionally, the Macquarie Promissory Note has a multiple on invested capital (“MOIC”) of (i) 1.11 to 1.00 if such prepayment occurs on or prior to the date that is four months after the closing date, (ii) 1.20 to 1.00 if such prepayment occurs after the date that is four months after the closing date but on or prior to the date that is seven months after the closing date, or (iii) 1.35 to 1.00 if such prepayment occurs after the date that is seven months after the closing date. The same 1.35 x return hurdle applies to repayment at maturity. The Company 16 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 anticipates repaying the Macquarie Promissory Note at maturity and as such, has recorded a MOIC liability of $ 16.5 million, representing the value of the MOIC liability as of the quarter ended November 30, 2024. Proceeds of the loan under the Macquarie Promissory Note were used, in part, to repay in full and terminate the CIM Promissory Note. Commensurate with the use of proceeds associated with construction from the Macquarie Promissory Note, the Company will capitalize approximately 90 % of the interest expense recognized each period. Additionally, proceeds were used to satisfy remaining obligations of the Company under the March Note. As partial consideration for the Macquarie Promissory Note, the Company issued warrants (the “Macquarie Warrants”) to purchase up to 1,035,197 shares of common stock. The Macquarie Warrants will be exercisable from and after the date that is six months following the date of issuance thereof and will have a five and one-half-year term and an exercise price of $ 9.66 per share, which exercise price must be paid in cash. The Macquarie Warrants were measured at fair value using a Black-Scholes Option Pricing model. Inherent in pricing models are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield, which are considered Level 3 inputs. The estimated fair value of the Macquarie Warrants was based on the following significant inputs: Macquarie Warrants Contractual term 5.5 years Volatility 95 % Risk-free rate 4.08 % Dividend yield — % The fair value of the Macquarie Warrants was $ 7.38 per warrant, totaling $ 7.6 million which was recorded as additional paid-in capital on the Company’s unaudited condensed consolidated balance sheets. The Company deferred the recognition of the fair value of the Macquarie Warrants as a reduction in the net carrying amount of the Macquarie Promissory Note and subsequently will amortize this balance into interest expense or CIP, as noted above, using the effective interest rate method. 7. Stockholders' Equity Common Stock Increases In Authorized Shares On June 11, 2024, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to its Second Amended and Restated Articles of Incorporation, as amended (the “Articles of Incorporation”). Pursuant to the Certificate of Amendment, the number of authorized shares of common stock was increased to 300,000,000 . The Certificate of Amendment became effective upon filing on June 11, 2024. Additionally, on November 20, 2024, the Company filed an amendment to its Articles of Incorporation, increasing the number of shares of common stock authorized for issuance to 400,000,000 shares and the number of shares of preferred stock authorized for issuance to 10,000,000 shares. Roth Capital Partners LLC On May 6, 2024, the Company began sales of common stock under an "at the market" sale agreement with Roth Capital Partners, LLC pursuant to which the Company could sell up to $ 25 million in aggregate proceeds of common stock. During the quarter ended August 31, 2024, the Company sold approximately 3.1 million shares for net proceeds of approximately $ 14.6 million with commission and legal fees related to the issuance of approximately $ 0.5 million. As of August 31, 2024, this offering was completed. At-the-Market Sales Agreement On July 9, 2024, the Company entered into a Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc., BTIG, LLC, Lake Street Capital Markets, LLC, Northland Securities, Inc. and Roth Capital Partners, LLC (collectively, the 17 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 “Agents”), pursuant to which the Company may offer and sell, from time to time, through the Agents, up to $ 125,000,000 in shares of the Company’s common stock. During the fiscal quarter ended August 31, 2024, approximately 3.0 million shares of the Company’s common stock has been issued and sold under the Sales Agreement for proceeds of $ 16.4 million net of issuance costs of $ 0.5 million. On October 30, 2024, the Company terminated its Sales Agreement with the Agents. Standby Equity Purchase Agreement ("SEPA") On August 28, 2024, the Company entered into the SEPA with YA Fund, which was amended on August 29, 2024. Pursuant to the SEPA, subject to certain conditions and limitations, the Company has the option, but not the obligation, to sell to YA Fund, and YA Fund must subscribe for, an aggregate amount of up to $ 250.0 million of common stock, at the Company’s request any time during the commitment period commencing on September 30, 2024, and terminating on October 1, 2027. In connection with the execution of the SEPA, the Company agreed to pay a structuring fee (in cash) to YA Fund in the amount of $ 25,000 . Additionally, the Company agreed to pay a commitment fee of $ 2,125,000 to YA Fund, (the Commitment Fee”), in the form of 456,287 shares of common stock (the “Commitment Shares”), representing $ 2,125,000 divided by the average of the daily VWAPs of the common stock during the three trading days immediately prior to the date of the SEPA. On October 16, 2024, the Company entered into a letter agreement with YA Fund, whereby the Company agreed to satisfy its obligations with respect to the Commitment Fee in cash by increasing the principal amount due under the March Note in an equivalent amount, instead of issuing the Commitment Shares. The Commitment Fee has been paid in full subsequent to November 30, 2024 as part of the repayment by the Company of the March Note. Pursuant to the SEPA, the Company agreed to file a registration statement with the SEC for the resale under the Securities Act by YA Fund of the common stock issued under the SEPA. The Company shall not have the ability to request any advances under the SEPA until such resale registration statement is declared effective by the SEC. As of the date of this report, the Company has not filed such a registration statement. Private Placement On September 5, 2024, the Company entered into a securities purchase agreement with a group of institutional and accredited investors, NVIDIA and Related Companies, for the private placement (the “Private Placement”) of 49,382,720 shares of the Company’s common stock, par value $ 0.001 per share, at a purchase price of $ 3.24 per share, representing the last closing price of the common stock on the Nasdaq Global Select Market on September 4, 2024. During the quarter ended November 30, 2024, the Private Placement closed with aggregate gross proceeds to the Company of approximately $ 160 million, before deducting offering expenses. Equity Plans 2024 Plan On October 8, 2024, the Company’s Board of Directors approved the Applied Digital Corporation 2024 Omnibus Equity Incentive Plan (the “2024 Plan”), which the Company’s stockholders approved on November 20, 2024. The 2024 Plan provides for grants of various equity awards for eligible employees, officers, non-employee directors and other service providers. Upon stockholder approval of the 2024 Plan, the Plans (as defined below) were terminated; provided that all awards (as defined in the Plans) outstanding under the 2022 Incentive Plan and the 2022 Non-Employee Director Stock Plan shall continue in effect in accordance with their terms. As of November 30, 2024, there were no awards granted under the 2024 Plan. 2022 Plans On October 9, 2021, the Company’s Board of Directors (the “Board”) approved two equity incentive plans, which the Company’s stockholders approved on January 20, 2022. The two plans consist of the 2022 Incentive Plan, previously referred to in the Company’s SEC filings as the 2021 Incentive Plan (the “Incentive Plan”), which provides for grants of various equity awards to the Company’s employees and consultants, and the 2022 Non-Employee Director Stock Plan previously referred to in the Company’s SEC filings as the 2021 Non-Employee Director Stock Plan (the “Director Plan” and, together with the Incentive Plan, the “Plans”), which provides for grants of restricted stock to non-employee directors and for deferral of cash and stock compensation if such deferral provisions are activated at a future date. 18 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 As of November 30, 2024, the Company had issued awards of approximately 20.4 million shares of common stock of the Company under the Plans. The Company recognized $ 3.5 million and $ 0.5 million of stock based compensation during the three and six months ended November 30, 2024, respectively, and $ 4.8 million and $ 10.4 million during the three and six months ended November 30, 2023, respectively. During the three months ended August 31, 2024, the Board determined that the performance criteria associated with certain performance stock units granted to certain executives in the third fiscal quarter of 2024 were not met. As such, 2.8 million performance stock unit awards were cancelled and the Company recognized a reversal of the expense previously recognized for the awards of approximately $ 6.0 million. Restricted Stock Awards The following is a summary of the activity and balances for unvested restricted stock awards granted for the six months ended November 30, 2024: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2024 638,895 $ 4.01 Granted — — Vested ( 142,565 ) 4.96 Forfeited — — Outstanding as of November 30, 2024 496,330 $ 3.73 As of November 30, 2024, total remaining expense to be recognized related to these awards was $ 1.4 million and the weighted average remaining recognition period for the unvested awards was 2.1 years. Restricted Stock Units The following is a summary of the activity and balances for unvested restricted stock units granted during the six months ended November 30, 2024: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding as of May 31, 2024 8,355,080 $ 3.58 Granted 3,823,550 6.44 Vested ( 1,419,102 ) 5.07 Forfeited ( 3,659,213 ) 2.27 Outstanding as of November 30, 2024 7,100,315 $ 5.50 As of November 30, 2024, total remaining expense to be recognized related to these awards was $ 33.9 million and the weighted average remaining recognition period for the unvested awards was 2.2 years. 8. Temporary Equity Preferred Stock Series E Redeemable Preferred Stock During the six months ended November 30, 2024, the Company closed on four offerings of the Series E Redeemable Preferred Stock (the “Series E Preferred Stock”). The Company sold total shares of 301,673 for proceeds of $ 6.9 million net of issuance costs of $ 0.6 million. The shares of Series E Preferred Stock have no voting or conversion rights. Holders of the Series E Preferred Stock are entitled to receive cumulative dividends at a fixed rate of 9.0 % per annum. Dividends are calculated based on a 360-day year, declared and accrued monthly, and payable at the discretion of the Board of Directors out of legally available funds. Dividends must be fully paid for all past periods before any distributions can be made to common stockholders or any junior series of equity securities. During the three and six months ended November 30, 2024, the Company declared and 19 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 paid approximately $ 0.2 million and $ 0.3 million, respectively, of dividends related to Series E Preferred Stock as presented on the unaudited condensed consolidated statements of operations. The Series E Preferred Stock ranks senior to all classes of common stock and junior to all existing and future debt of the Company. Additionally, it is on parity with any future series of preferred stock with substantially identical terms but may rank junior to any future series of preferred stock if the holders of such series are entitled to rights and preferences with priority over the holders of the Series E Preferred Stock. In the event of liquidation, holders are entitled to receive $ 25.00 per share (the “Series E Stated Value”) plus any accrued but unpaid dividends before any distributions are made to common stockholders. The Series E Preferred Stock has no stated maturity and remains outstanding indefinitely unless redeemed or repurchased by the Company. Holders may require the Company to redeem any portion of their Series E Preferred Stock at any time for a "Settlement Amount" calculated as the Series E Stated Value plus any unpaid dividends, less a Holder Optional Redemption Fee, equal to a percentage of the Series E Stated Value based on the year when the redemption occurs as follows: 9.00 % prior to the first anniversary of the respective tranche closing date (the "Original Issuance Date"); 7.00 % on or after the first anniversary but prior to the second anniversary of the Original Issuance Date; 5.00 % on or after the second anniversary but prior to the third anniversary of the Original Issuance Date: and 0.00 % on or after the third anniversary of the Original Issuance Date. The Settlement Amount can be settled in cash or shares of common stock, subject to a share cap, which limits the total shares deliverable upon redemption to 19.99 % of the common stock outstanding prior to the Series E Preferred Stock offering ( 25,475,751 shares, the “Share Cap”). Any portion of the Settlement Amount exceeding this cap will be settled in cash. The Company may also redeem shares of Series E Preferred Stock after the second anniversary of the original issuance date, with a minimum notice of 10 days, at the Company Optional Redemption Settlement Amount, which is equal to the Series E Stated Value per share plus any unpaid and accrued dividends. If the Company elects to pay the redemption amount in shares, then the number of shares to be delivered will be calculated as the Company Optional Redemption Settlement Amount divided by the closing price per share of the common stock on the date of the Company Optional Redemption exercise, subject to the Share Cap. The Series E Preferred Stock offering was terminated on August 9, 2024. Series F Convertible Preferred Stock On August 29, 2024, the Company entered into a securities purchase agreement for the private placement of 53,191 shares of Series F Convertible Preferred Stock, par value $ 0.001 per share (the “Series F Convertible Preferred Stock”), including 3,191 shares representing an original issue discount of 6 %. The transaction closed on August 30, 2024, for total proceeds of $ 50.0 million, prior to fees paid to Northland Securities, Inc. for their role as placement agent in an amount equal to 3.5 % of the total proceeds. The shares of Series F Convertible Preferred Stock are convertible into shares of common stock only upon the receipt of shareholder approval, which was received on November 20, 2024. Holders of the Series F Convertible Preferred Stock are entitled to cumulative dividends at an annual rate of 8.0 % of the stated value of $ 1,000 per share (the “Series F Stated Value”), payable quarterly in arrears. Dividends are calculated based on a 360-day year, declared and accrued quarterly, and payable at the discretion of the Board of Directors out of legally available funds. Dividends must be fully paid for all past periods before any distributions can be made to common stockholders or any junior series of equity securities. During the three and six months ended November 30, 2024, the Company declared and paid approximately $ 0.4 million, respectively, of dividends related to the Series F Convertible Preferred Stock as presented on the unaudited condensed consolidated statements of operations. The Series F Convertible Preferred Stock ranks senior to all classes of common stock and junior to all existing and future debt of the Company. In the event of liquidation, holders are entitled to receive the Series F Stated Value plus any accrued but unpaid dividends before any distributions are made to common stockholders. Series F Convertible Preferred Stock is on parity with the Series E Preferred Stock, Series E-1 Preferred Stock and any future series of preferred stock with substantially identical terms. Upon the receipt of shareholder approval on November 20, 2024, the Series F Convertible 20 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 Preferred Stock votes on an as-converted basis, subject to a cap equal to the greater of (x) the conversion price then in effect or (y) $ 4.0638 . Holders have the right to require the Company to redeem the Series F Convertible Preferred Stock under certain conditions, including a Change of Control or Trading Failure, each as defined in the Series F Convertible Preferred Stock certificate of designation. If there is a Change of Control, the redemption price is the greater of the Series F Stated Value or the amount that would have been received if the Series F Convertible Preferred Stock had been converted into common stock immediately prior to the redemption event. If there is a Trading Failure, the redemption price is the greater of the Series F Stated Value or the product of the lowest conversion price during the period beginning on the date immediately preceding the Trading Failure and ending on the date the holder delivers a Redemption Notice, multiplied by the number of shares of common stock into which the preferred stock is convertible at the then-effective conversion price. Additionally, holders have a one-time right to require the Company to redeem their shares between December 31, 2024, and January 10, 2025 in which case the redemption price is the Series F Stated Value. Further, upon receipt of shareholder approval of the conversion feature of the Series F Convertible Preferred Stock, which approval was received on November 20, 2024, if the VWAP for any 20 Trading Days during any 30 consecutive trading day period, beginning with the original issuance date of the applicable preferred stock, exceeds two hundred percent ( 200 %) of the conversion price then in effect, the Company may, at any time cause the holder to convert all or part of the holder’s preferred stock. During the three months ended November 30, 2024, 10,191 shares of Series F Convertible Preferred Stock were converted into approximately 1.5 million shares of the Company’s common stock. Subsequent to the quarter end, the remaining 43,000 shares of the Series F Convertible Preferred Stock were converted into approximately 6.1 million shares of the Company’s common stock. Series E-1 Preferred Stock On September 23, 2024, the Company entered into a dealer manager agreement for the offering of up to 62,500 shares of Series E-1 Redeemable Preferred Stock, par value $ 0.001 per share (“Series E-1 Preferred Stock”), at a price per share of $ 1,000 (the “Series E-1 Stated Value”). During the three months ended November 30, 2024, the Company closed on two offerings of the Series E-1 Preferred Stock in which the Company issued and sold 6,359 shares for gross proceeds of $ 6.4 million. The Series E-1 Preferred Stock offering remains ongoing as of the date of this report. The shares of Series E-1 Preferred Stock have no voting or conversion rights. Holders of the Series E-1 Preferred Stock are entitled to receive cumulative dividends at a fixed rate of 9.0 % per annum of the Series E-1 Stated Value. Dividends are calculated based on a 360-day year, declared and accrued monthly, and payable at the discretion of the Board of Directors out of legally available funds. Dividends on the shares of Series E-1 Preferred Stock must be fully paid for all past periods before any distributions can be made to common stockholders or any junior series of equity securities. During the three and six months ended November 30, 2024, the Company declared and paid approximately $ 48,000 of dividends related to the Series E-1 Preferred Stock as presented on the unaudited condensed consolidated statements of operations. The Series E-1 Preferred Stock ranks senior to all classes or series of common stock and junior to all existing and future debt of the Company. Additionally, the Series E-1 Preferred Stock is on parity with the Series E Preferred Stock, the Series F Convertible Preferred Stock and any future series of preferred stock with substantially identical terms but may rank junior to any future series of preferred stock if the holders of such series are entitled to rights and preferences with priority over the holders of the Series E-1 Preferred Stock. In the event of liquidation, holders of the Series E-1 Preferred Stock and holders of shares of any other class or series of capital stock ranking senior to or on a parity with the Series E-1 Preferred Stock, are entitled to receive an amount per share equal to the Series E-1 Stated Value plus an amount per share that is issuable as a result of any accrued but unpaid dividends before any distributions are made to common stockholders. The Series E-1 Preferred Stock has no stated maturity and remains outstanding indefinitely unless redeemed or repurchased by the Company. Holders may require the Company to redeem any portion of their Series E-1 Preferred Stock at any time for a "Settlement Amount" calculated as the Series E-1 Stated Value plus any unpaid dividends, less a Holder Optional Redemption Fee 21 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 equal to a percentage of the Series E-1 Stated Value based on the year when the redemption occurs as follows: 9.00 % prior to the first anniversary of the respective tranche closing date (the "Original Issuance Date"); 7.00 % on or after the first anniversary but prior to the second anniversary of the Original Issuance Date; 5.00 % on or after the second anniversary but prior to the third anniversary of the Original Issuance Date: and — % on or after the third anniversary of the Original Issuance Date. The Settlement Amount can be settled in cash or shares of common stock at the sole option of the Company, subject to a share cap (if required by Nasdaq rules and regulations), which limits the total shares deliverable upon redemption to 19.99 % of the common stock outstanding immediately prior to the Series E-1 Preferred Stock offering ( 25,889,470 shares, the “Share Cap”), unless approval by the Company’s stockholders is obtained to exceed the Share Cap. Any portion of the Settlement Amount exceeding this cap will be settled in cash. Holders may not redeem any shares of Series E-1 Preferred Stock for common stock prior to the first anniversary of the Original Issuance Date. The Company may also redeem shares of the Series E-1 Preferred Stock after the second anniversary of the Original Issuance Date, with a minimum notice of 10 days, at a redemption price equal to the Series E-1 Stated Value plus any accrued but unpaid dividends. If the Company elects to pay the redemption amount in shares, then the number of shares to be delivered will be calculated as the Settlement Amount divided by the closing price per share of the common stock on the last trading day prior to the date upon which notice was provided to the holder, subject to the Share Cap, if applicable. 9. Leases From time to time, the Company enters into leases for equipment, office space and co-location space. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company presents operating and finance right of use assets and liabilities separately on the balance sheet as their own captions, with the liabilities split between current and long-term, respectively. Components of lease expense were as follows (in thousands): Three Months Ended Six Months Ended November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023 Operating lease cost: Operating lease expense $ 8,941 $ 2,486 $ 17,882 $ 2,970 Short-term lease expense 39 80 60 207 Total operating lease cost 8,980 2,566 17,942 3,177 Finance lease expense: Amortization of right-of-use assets (1) 23,381 10,860 54,651 16,490 Interest on lease liabilities 4,923 1,659 9,279 2,741 Total finance lease cost 28,304 12,519 63,930 19,231 Variable lease cost 62 40 117 77 Sublease Income — ( 24 ) — ( 47 ) Total net lease cost $ 37,346 $ 15,101 $ 81,989 $ 22,438 (1) Amortization of right-of-use assets is included within cost of revenues and selling, general and administrative expense in the unaudited condensed consolidated statements of operations. 22 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 The following table represents the Company’s future minimum lease payments as of November 30, 2024: Operating Leases Finance Leases Total Remainder of FY25 $ 15,609 $ 70,935 $ 86,544 FY26 32,035 143,804 175,839 FY27 32,697 14 32,711 FY28 33,453 1 33,454 FY29 25,240 — 25,240 Thereafter 3,536 — 3,536 Total lease payments 142,570 214,754 357,324 Less: imputed interest ( 21,653 ) ( 15,846 ) ( 37,499 ) Total lease liabilities 120,917 198,908 319,825 Less: Current portion of lease liability ( 23,096 ) ( 136,511 ) ( 159,607 ) Long-term portion of lease liability $ 97,821 $ 62,397 $ 160,218 Supplemental cash flow and other information related to leases is as follows: Six Months Ended November 30, 2024 November 30, 2023 Weighted-average years remaining (in years): Finance leases 3.6 years 5.5 years Operating leases 3.2 years 5.7 years Weighted-average discount rate: Finance leases 10.2 % 8.8 % Operating leases 7.8 % 7.9 % The Company has entered into leases which are executed but not yet commenced with total minimum payments of approximately $ 18.9 million. The payments are for various leases with terms of 2 years. 10. Commitments and Contingencies Commitments Energy Contracts As of November 30, 2024, the Company had a minimum commitment of approximately $ 61.1 million related to the energy services agreement for its Jamestown, North Dakota co-hosting facility payable over, approximately, the next 2.2 years. Construction Contracts The Company routinely engages with construction vendors for the construction of our facilities. These engagements are governed by contracts containing standard terms and conditions, including certain milestones that obligate the Company to pay as work is completed. In the event of termination of any of these contracts by the Company, the Company would be liable for all work that has been completed or in process, plus any applicable fees. The Company generally has the right to cancel these open purchase orders prior to delivery or terminate the contracts without cause. Claims and Litigation From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. The Company, Wes Cummins, the Company's Chief Executive Officer, and David Rench, the Company's then Chief Financial Officer, have been named as defendants in a putative securities class action lawsuit in the matter styled, 23 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 McConnell v. Applied Digital Corporation, et al., Case No. 3:23-cv-1805, filed in August 2023 in the U.S. District Court for the Northern District of Texas (the “Securities Lawsuit”). Specifically, the complaint asserts claims pursuant to Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 based on allegedly false or misleading statements regarding the company’s business, operations, and compliance policies, including claims that the Company overstated the profitability of its Data Center Hosting Business and its ability to successfully transition into a low-cost cloud services provider and that the Company’s board of directors was not “independent” within the meaning of Nasdaq listing rules. On May 22, 2024, the court appointed lead plaintiff and approved lead counsel, and on July 22, 2024, Lead Plaintiff filed an amended complaint which asserts the same claims based on similar allegations in the original complaint. On September 20, 2024, the defendants filed a motion to dismiss the amended complaint. On November 20, 2024, Lead Plaintiff filed his opposition to the Motion to Dismiss. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in the Securities Lawsuit. If an unfavorable action were to occur, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable. On November 15, 2023, a derivative action was filed in the matter styled, Weich v. Cummins, et al., Case No. A-23-881629-C in the District Court of Clark County, Nevada (the “Derivative Lawsuit”). The Weich complaint named as defendants certain members of the Company’s Board of Directors and its Chief Executive Officer Wesley Cummins and purports to name the Company’s then Chief Financial Officer David Rench as a defendant. The complaint asserted claims for breach of fiduciary duties, corporate waste and unjust enrichment based upon allegations that the defendants caused or allowed the Company to make materially false and misleading statements regarding the Company’s business, operations, and compliance policies. Specifically, the complaint alleged that the Company overstated the profitability of the Data Center Hosting Business and its ability to successfully transition into a low-cost cloud services provider and that the Board was not “independent” within the meaning of Nasdaq listing rules. On February 27, 2024, the derivative plaintiff filed an amended complaint asserting the same claims as the original complaint. On June 5, 2024, following briefing and argument on the defendants’ motion to dismiss the Derivative Lawsuit, the Court entered an order granting the defendants’ motion without prejudice and dismissing all claims against all defendants, including the Company, on the grounds that the plaintiff failed to plead (1) demand futility as to each of plaintiff’s claims or (2) a claim for breach of fiduciary duty. The order dismissed all claims against all defendants, including the Company. The plaintiff can seek leave to file an amended complaint but to date has not done so. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision in this action. If an unfavorable action were to occur, it is possible that the impact could be material to the Company’s results of operations in the period(s) in which any such outcome becomes probable and estimable. As of November 30, 2024, there were no other pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations. There are also no legal proceedings in which any of the Company’s management or affiliates is an adverse party or has a material interest adverse to the Company’s interest. Garden City Release of Escrow Funds On July 30, 2024, the Company announced that it had met the conditional approval requirements related to the release of the escrowed funds from the sale of its Garden City hosting facility. As of the date of this report, the Company has received the remaining $ 25 million of the purchase price held in escrow pending such conditional approval which was included in gain on classification of held for sale in its unaudited condensed consolidated statements of operations. 24 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 11. Business Segments Revenue by segment (excluding HPC hosting as that segment has no revenue) was as follows (in thousands): Three Months Ended Six Months Ended November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023 Data center hosting segment $ 36,163 $ 37,753 $ 71,012 $ 71,925 Cloud services segment 27,705 4,450 53,560 6,602 Total revenue $ 63,868 $ 42,203 $ 124,572 $ 78,527 Segment profit (loss) and a reconciliation to net loss before income tax expenses is as follows (in thousands): Three Months Ended Six Months Ended November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023 Segment profit (loss) Data center hosting segment (1) $ 12,550 $ 10,896 $ 48,401 $ 19,897 Cloud services segment ( 5,810 ) ( 11,559 ) ( 21,620 ) ( 18,964 ) HPC hosting segment ( 5,839 ) ( 908 ) ( 8,784 ) ( 1,662 ) Total segment profit (loss) 901 ( 1,571 ) 17,997 ( 729 ) Other (2) ( 19,516 ) ( 6,341 ) ( 27,128 ) ( 14,551 ) Operating loss ( 18,615 ) ( 7,912 ) ( 9,131 ) ( 15,280 ) Interest expense, net 7,482 2,617 14,790 4,750 Loss on conversion of debt 25,410 — 33,612 — Loss on change in fair value of debt 87,218 — 85,439 — Loss on debt extinguishment — — — 2,353 Net loss before income tax expenses $ ( 138,725 ) $ ( 10,529 ) $ ( 142,972 ) $ ( 22,383 ) (1) The six months ended November 30, 2024 includes a $ 25 million gain on classification of held for sale related to the satisfaction of a contingency associated with the sale of the Garden City facility. (2) Other includes corporate related items not allocated to reportable segments. We also provide the following additional segment disclosures (in thousands): Three Months Ended Six Months Ended November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023 Depreciation and amortization: Data center hosting segment $ 3,298 $ 4,365 $ 6,657 $ 7,564 Cloud services segment 21,733 8,782 51,951 13,290 HPC hosting segment 1,353 184 2,074 311 Other (1) 61 93 124 119 Total depreciation and amortization (2) $ 26,445 $ 13,424 $ 60,806 $ 21,284 (1) Other includes corporate related items not allocated to reportable segments. (2) Includes amortization of the finance lease right-of-use assets. 25 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 Information on segment assets and a reconciliation to consolidated assets are as follows (in thousands): November 30, 2024 May 31, 2024 Data center hosting segment $ 140,809 $ 145,222 Cloud services segment 389,898 374,216 HPC hosting segment 717,131 220,648 Total segment assets 1,247,838 740,086 Other (1) 295,331 22,781 Total assets $ 1,543,169 $ 762,867 (1) Other includes corporate related items not allocated to reportable segments. 12. Earnings Per Share Basic net income (loss) per share (“EPS”) of common stock is computed by dividing a company’s net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Potentially dilutive securities are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive. The table below shows the calculation for earnings per share: Three Months Ended Six Months Ended November 30, 2024 November 30, 2023 November 30, 2024 November 30, 2023 Net loss $ ( 138,726 ) $ ( 10,529 ) $ ( 142,973 ) $ ( 22,383 ) Net loss attributable to noncontrolling interest — — — ( 397 ) Preferred dividends $ ( 629 ) $ — $ ( 673 ) $ — Net loss attributable to Common Stockholders $ ( 139,355 ) $ ( 10,529 ) $ ( 143,646 ) $ ( 21,986 ) Basic and diluted net loss per share attributable to common stockholders $ ( 0.66 ) $ ( 0.10 ) $ ( 0.80 ) $ ( 0.21 ) Basic and diluted weighted average number of shares outstanding 209,560,339 109,663,030 179,119,398 105,067,375 As of November 30, 2024 and 2023, the Company had approximately 7.6 million and 8.5 million shares, respectively, of granted but unvested restricted stock and restricted stock units that would have a potentially dilutive effect on earnings per share. As of November 30, 2024, the Company had approximately 7.5 million shares associated with the Preferred Stock which have been excluded from the calculation of earnings per share because the effect of those shares would be antidilutive. Additionally, the Company had approximately 6.3 million warrants outstanding as of November 30, 2024, which have been excluded from the calculations of earnings per share because the effect of those shares would be antidilutive. 13. Subsequent Events Unit Purchase Agreement On January 13, 2025, APLD HPC Holdings LLC (“APLDH”), an indirect wholly owned subsidiary of the Company, entered into a Unit Purchase Agreement (the “Unit Purchase Agreement” or “UPA”) for its HPC Hosting Business with MIP VI HPC Holdings, LLC, which is an affiliate of funds and investment vehicles managed by entities within Macquarie Asset Management (“MAM”). Pursuant to the terms of the UPA, MAM will invest up to $ 900 million to fund the equity portion of the construction costs for the Company’s 400 MW Ellendale, North Dakota datacenter campus (the “Ellendale Campus”), with the initial investment of $ 225 million payable at closing, and the remaining $ 675 million payable in 26 Table of Contents APPLIED DIGITAL CORPORATION AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (Unaudited) For the Three and Six Months Ended November 30, 2024 increments of $ 2.25 million for each executed lease of 1 MW of capacity. MAM also has a right to invest up to an additional $ 4.1 billion in future HPC development projects. MAM will receive preferred and common units for its investment. The common units represent fifteen percent ( 15 %) of APLDH’s fully diluted common equity. The preferred units will accrue a dividend at a rate of 12.75 % per annum, paid in stock or cash, at APLDH’s election, which will increase by 87.5 basis points on the fifth and sixth anniversaries of the closing, if still outstanding, and will carry a minimum 1.80x multiple of invested capital liquidation preference, inclusive of the value of the common equity. The closing is conditioned upon, among other things, APLDH executing a lease with a hyperscaler for the first 100 MW on the Ellendale Campus, in a form acceptable to MAM, the parties finalizing and executing a limited liability company agreement for APLDH (the “LLCA”), for the Company and APLDH to carry out an internal restructuring to segregate the HPC Hosting Business’ assets and liabilities before closing, as well as other customary closing conditions. In addition, the Unit Purchase Agreement provides for the Company to issue to MAM at closing two warrants to purchase 4,458,069 shares each, for a total of 8,916,138 shares of the Company’s common stock at the exercise price of $ 8.29 per share. The common shares issuable upon exercise of the warrants are subject to customary registration rights pursuant to a registration rights agreement to be executed and delivered at closing. The LLCA is expected to contain customary provisions for transactions of this nature, including, for example, co-sale rights, transfer restrictions, governance rights, redemption rights, forced sale rights, and step-in rights. Other than the event described above and the events described in Note 6 - Debt, Note 7 - Stockholders' Equity and Note 8 - Temporary Equity, there are no additional subsequent events through the date of issuance of these unaudited condensed consolidated financial statements which require adjustment or disclosure. 27 Table of Contents